A recent article in The Wall Street Journal contained some interesting, but possibly misleading, information regarding the sales of small businesses.
The information primarily came from BizBuySell.com, an online listing service for small-business sales. Here is the gist of the report.
The businesses using the site are small with annual revenue of about $350,000. The number of businesses sold increased 8.3 percent from a year earlier from 1,106 to 1,198. Thats good news.
The article said the increase in number of sales doesnt indicate improving business and banking conditions. Rather, it is driven by sellers cutting their asking prices and self-financing a significant part of the sale price.
As proof, it points to a 4 percent reduction in the median asking price, from $249,000 to $239,000, and a 3 percent decrease in the median sale price, from $155,000 to $150,000. These seem like small changes to me.
Of more importance, in my opinion, is the 10 percent drop in the median asking price of businesses that actually sold, from $195,000 to $175,000. Note that the median asking price of businesses that actually sold is almost 27 percent lower than the overall median asking price. That indicates that successful sellers are putting more realistic prices on their businesses.
The comment regarding seller financing is irrelevant because businesses of this size have always relied on seller financing.
Increased business sales is good news, but we must temper it. The market represented by the BizBuySell.com report is small and may not be representative of the small-business acquisition market overall.
Small-business owners choose to sell for many reasons. Frequently, the sellers do not understand what creates business value, and they overprice their firms. Many small businesses dont sell, and owners end up liquidating or closing the doors. Sometimes owners put a business up for sale expecting that, over time, a buyer will appear who is willing to pay their price. There are buyers, but they are not willing to overpay, and they have a more negative view of the future in todays prolonged and uncertain economic environment.
I suspect some of the improvement in the sales picture comes from owners who no longer are willing to hang on waiting for a buyer at their price. I view that possibility as good news as it indicates an acceptance of reality and a rational decision.
Here are some points to keep in mind:
Dont offer your business for sale unless you are serious. Indicate your seriousness by preparing a professional selling package. Make sure all the numbers in the financial statement, tax return and other governmental filings agree.
Price your business in line with the current economy and actual profitability of the company.
Seek professional guidance.
Require a signed confidentiality agreement before you release any substantial financial information.
Remember, seek professional guidance. Yes, I know I just repeated myself. Sound advice may be the difference between a business that sells and one that goes out of business.
Bowser@Business ValueInsights.com Dan Bowser is president of Value Insights Inc. of Durango; Chandler, Ariz.; and Summerville, Pa.